It looks cut-and-dried at first. Chas got nailed for a deficiency back in 2011, and Sixth Circuit affirmed the nailing. But now Chas wants to move out of time to vacate the affirmed decision, claiming IRS defrauded him and Tax Court.

Chas claims IRS grabbed documents by the truckload from him and his partner George Rogers. Chas and George took a plea in their criminal cases, and George lost a civil case.

IRS asked George if he wanted his partnership papers back, and he said no, destroy them.

IRS claims they did, or that they didn’t exist, when Chas tried the deficiency case against him. Chas said he needed the papers to prove that what IRS claimed was income was really loans.

IRS said there was no reason to suppose that any documents existed that would exonerate Chas. Moreover, said IRS “but what he dreams is missing never existed in the first place. What are the specific missing documents? Cancelled checks and bankrecords showing his fictitious loans to Trans and Branch? Those never existed. You cannot go missing if you never existed. There is no missing evidence that would have helped Garavaglia.” Order, at p. 7.

So Chas lost at Tax Court, and Sixth Circuit affirmed.

Lo and behold, as a now-deceased colleague used to say, two-and-a-half years later, there turns up in the IRS CID evidence room several, disorganized boxes of documents with Chas’s name on them. Probably next to the Rose Law Firm billing records. But remember, this is a non-political blog.

IRS tells Chas, and Chas tells “foul”. He gets 5 boxes, but IRS says there are 30, and of the 17,384 documents IRS gives Chas, some are canceled checks.

Now, as my younger daughter remarked when the Bible reading began with Genesis 1:1, “Settle down, we have a long way to go”.

Question one: has Tax Court authority to vacate the earlier decision, even if fraud could be proven?

Tax Court is an Article I court. That means it doesn’t have the full weaponry of the rest of the Federal judicial system (Article III). Tax Court has what Congress gave it. And that ain’t much, as readers of my blog have long since discovered.

Of course, any Court which hasn‘t authority to set aside its decisions when it has been defrauded is a place where fraud can flourish. After all, if a runner knows the pitcher and catcher can’t try a pickoff, why not steal a base? Or maybe two? And if the ref can’t send a player to the sin-bin, why not hook, trip or slash?

But Judge Laro plows through various Sixth Circuit cases and finds Tax Court has authority to vacate its orders, opinions and decisions when it has been defrauded, at least in the Sixth Circuit.

Question two: Why should a line on a map determine whether a court can set aside a decision, order, judgment or opinion when, in G. M. Fraser’s words, justice “was not only blind, but had a bag over her head”? Or in Paul Simon’s words, why should a party, be it government or taxpayer, be able to defraud the Court when they’re “one step ahead of the shoe shine. Two steps away from the county line.” ?

I leave that question to Congress.

Question three: OK, so what’s the test for fraud?

Judge Laro turns to the case of John Demjanjuk. Demjanjuk was accused of being a Nazi death camp guard, stripped of his US citizenship and sent to Israel for a war crimes trial. Though convicted, his conviction was overturned on appeal. Sent to Germany, he was tried there, convicted again, but died before he could appeal, so the conviction was reversed.

The US prosecutors got nailed for defrauding the US court.

Here’s the test Sixth Circuit used: The fraud must be “1. On the part of an officer of the court; 2. That is directed to the ‘judicial machinery’ itself; 3. That is intentionally false, wilfully blind to the truth, or in reckless disregard for the truth; 4. That is a positive averment or is concealment when one is under a duty to disclose; 5. That deceives the court.” Order, at p. 12.

And the party seeking to vacate must prove all five elements by clear and convincing proof.

Now in this case Chas is alleging fraud, and the court is reviewing his pleadings, so his pleadings get the benefit of the doubt. He hasn’t got to prove any of this yet, but if he gets past the paper barrier, he gets his shot at proving what he alleges.

And Chas clears the barriers.

IRS counsel are officers of the court. Chas’s attorneys asked for the documents in discovery and were told they didn’t exist. Because Chas couldn’t present a defense, that subverts the judicial process, because the court can’t fairly decide. Likewise IRS’s attorneys acted with reckless disregard, as they never searched the evidence room, where thirty (count ‘em, thirty) boxes of documents reposed. They certainly had a duty to disclose, as Tax Court rules require disclosure. And the court was certainly deceived, if the judge believed there were no documents, when in fact there were.

OK, so Chas pled a case. Now what?

So far, only paper. Now it’s time to put witnesses on the stand, put papers and things in evidence, and subject all the witnesses to what Dean John Henry Wigmore called ““the greatest legal engine ever invented for the discovery of truth”–cross-examination.

Incidentally, Dean John Henry Wigmore was the greatest authority on the law of evidence in my young day. But his name is definitely his fame. I sometimes think if I had been named Lewis C Wigmore, I’d be on the Supreme Court handing down oracular pronouncements at least worthy of Olympus, if not Sinai, rather than grinding out blogposts as Taishoff the Obscure.

So Judge Laro wants the parties to prepare memoranda, with witness lists and gists, and show up for a hearing.

We all know that 11USC§362(a)(8) erects an impenetrable barrier against the “commencement or continuation of a proceeding before the United States Tax Court concerning a tax liability of a debtor… who is an individual for a taxable period ending before the date of the order for relief under this title.”

And we all know that Section 6213(f)(1) also stops the clock on the time for filing a petition in Tax Court until the earliest of closing the case, granting or denying discharge, or dismissal of the case, tracking 11USC§362(c)(2), and for 60 days thereafter.

But what happens when a petition is filed in violation of the §362(a)(8) barricade, but a purported amendment is filed after discharge, but within the 60 day window? As no petition was filed as a matter of law, there should be nothing to amend. An interesting question.

Well, Ch J Michael B. (“Iron Mike”) Thornton deals with such academic issues in the same way as a very senior partner of a very highpowered law firm told me forty years ago: “Mr Taishoff, we are not here for the romantic practice of law.”

Ch J Iron Mike: “Inasmuch as the Amended Petition…was filed after petitioner Gary Martell received discharge in his bankruptcy case, that Amended Petition shall be filed as a petition at Docket No. 22347-14.” Order, at p. 2.

Mary didn’t timely answer a request by IRS for deemed admissions. So the admissions were deemed made.

Mary, seeing her case going down the drain, enwrapped in the whirlpool of said admissions, moves to withdraw her deemedness.

But her attorney gets it wrong (and I’m sure many attorneys would to the same).

Judge Big Jim: “Petitioner failed to comply with Rule 50(a), addressing the form and content of motions, in that she failed to state whether respondent objects to the motion. We assume, therefore, that respondent objects. See Rule 50(a). As grounds for the motion, petitioner includes an affidavit of her counsel…, stating without further explanation that he ‘missed the notice from the Court for Respondent’s Request for Admissions.’ If petitioner wishes to remake the motion, she may wish to offer the Court a fuller explanation, including when and how counsel became aware of his failure. Petitioner also attempts to answer the request for admissions by counsel’s affidavit, which satisfies neither the requirements as to form or substance found in Rule 90(c). We shall, given the defects and inadequacy of the motion, deny it.” Order, at p. 1. (Name omitted).

Nevertheless, the denial is without prejudice, so Mary and counsel can “remake” a motion for time to reply to IRS’ request for admissions.

No doubt Kimberly was abused by ex-spouse George. She lost three jobs because he hounded her, and finally wound up seeking psychiatric help. They finally divorced, but the decree just says they’ll file separate returns thereafter, nothing about past liabilities.

“The record provides a dismal picture of an extremely dysfunctional marriage that quickly deteriorated into separation in mid-March 2008 and a final divorce three months later. Petitioner’s sister testified credibly and convincingly that by the time petitioner left intervenor she was so emotionally traumatized and distraught that she was contemplating suicide. Her treatment and recovery spanned the better part of the next 12 months. Against this backdrop, it is not difficult to comprehend how petitioner may have decided in early 2008 to abandon the practice of filing a joint return with intervenor. We likewise have no reason to doubt petitioner’s statement that she believed (albeit erroneously) that she had sufficient income tax withholding so that there was no pressing need to file a separate return for 2007.” 2014 T. C. Sum. Op. 99, at p. 12.

Meanwhile, Kimberly took a couple of IRA distributions in 2007, some of whose proceeds she claims she gave George for household expenses, but he says she didn’t.

Howbeit, there’s a MFJ e-filed 1040 for that year, but the electronic authorization was signed only by George, and none appears for Kimberly. Only one IRA drawdown is disclosed, and that’s claimed to be a rollover (which it wasn’t). The paid preparer doesn’t testify on the trial, so although George claims Kimberly was there when the return was filed and agreed to it, and Kimberly claims she wasn’t and didn’t, STJ Yuda believes Kimberly, because George’s testimony didn’t wash.

But there’s no doubt the IRA drawdowns were made by Kimberly, however she spent the proceeds thereof, and she neither filed a separate return nor was aged above the magic 59-1/2 years.

STJ Yuda finds there was no joint return. So Kimberly wins, right?

Wrong.

“Considering all the facts and circumstances, we conclude that petitioner did not intend to file a joint income tax return with intervenor for 2007, and the return at the center of this controversy is not a valid joint return as contemplated by section 6013(a). It follows that a prerequisite to the application of section 6015 is lacking, and petitioner is ineligible for spousal relief for the taxable year 2007 by way of this proceeding.” 2014 T. C. Sum. Op. 99, at pp. 14-15.

How come, you will ask.

Well, STJ Yuda will tell you.

“If certain requirements are met, a spouse may be relieved of joint and several liability under section 6015. No relief is available under section 6015, however, if the taxpayer did not file a joint income tax return. See Raymond v. Commissioner, 119 T.C. 191, 194-197 (2002). Section 6015(e) vests the Court with jurisdiction to review the Secretary’s final determination of spousal relief.” 2014 T. C. Sum. Op. 99, at p. 10.

Anyway, the items giving rise to the deficiency were both Kimberly’s, not George’s. And, of course, there was no joint return.

For background, see my blogpost “Mail Call”, 9/16/11. Section 7502 “mailed is filed” applies only to private delivery services (like UPS or FedEx) blessed by IRS, and not even all services offered by the blessed ones are included in IRS’ largesse.

Barry Leonard is a belt, suspenders and crazy-glue kind of guy, so he sent off duplicate originals of his petition on the same day (being the last day of the magic 90-day period) both by FedEx First Overnight and USPS Certified Mail.

The intake squad at 400 Second Street, NW, getting what looks like two petitions, opens two docket numbers.

No biggie, right? Close one on ground of duplication, and go on with the case.

Now here’s where IRS gets crafty and slimy.

FedEx First Overnight is not on the magic list. Other FedEx services are; so be careful, practitioner. Read my blogpost aforementioned, get the final regs, check out the services, and ask for the right one. Remember, like aircraft exit signs, the right one may not be the fastest or nearest. So mailing on the last day (or rather, delivery to the person in purple-and-grey) doesn’t help Barry Leonard. He’s a day late and much more than a dollar short.

His certified mail version does satisfy Section 7502, so Barry Leonard is timely.

You can guess what IRS does, and you gotta give them credit for craft and sleaze.

They move to close the timely petition (the certified job) for duplication, leaving the FedEx wrong job, which would set up a motion to dismiss for lack of jurisdiction (untimely filing).

Their attorney is lucky I’m not a judge and didn’t have this case.

They did have Ch J Iron Mike, who is positively douce (as they say in Edinburgh) to IRS, closing out the FedEx petition and leaving the certified job, “…to afford petitioner the greatest protection under section 7502, I.R.C….”, Order, at p. 2.

Maryann and Tom had a big NOL, and decided to carry it forward, wiping out some tax. But they never filed the Section 172(b)(1) and (3) election timely.

You need to do that if you elect not to go back two years with an NOL, but rather to go forward off the bat.

Then they asked IRS for tax advice, were told to amend to carryback and then carryforward. They did, and asked IRS to credit the remainder of the NOL forward.

IRS didn’t. They just refunded whatever was left to Maryann and Tom.

This left Maryann and Tom short the next year, and they got charged beaucoup interest.

They went to Nina (“The Big O”) Olson’s Taxpayer Advocate Service, who told them too bad, so sad, but IRS didn’t create the problem, you did.

And that’s where Judge Gustafson leaves it.

Interest on underpayment and overpayment are asymmetrical, which means unfair, but that’s life.

“On the one hand, a taxpayer will owe underpayment interest beginning on “the last date prescribed for payment”, sec. 6601(a), which for individual income tax is the due date of the return–typically April 15 of the following year, see secs. 6072(a), 6151(a)–without regard to when or whether he actually files his return. On the other hand, the Government will owe no interest on an overpayment before the return is filed, sec. 6611(b)(3); and where (as here) the relevant return is deemed untimely filed… the Government will owe no interest at all if the overpayment ‘is refunded within 45 days after the date the return is filed’, sec. 6611(e)(1).” 2014 T. C. Memo. 195, at p. 15.

And IRS coughed up within 45 days of when Maryann and Tom finally got it right.

Well, what about the advice they got from IRS? Well, first, Maryann and Tom don’t say exactly what was wrong with what IRS told them. Anyway, giving legal advice is neither “ministerial” nor “managerial”, and those are the only IRS acts that set up an abatement.

“Providing an interpretation of Federal tax law (such as on the question whether section 172 requires a taxpayer to carry back an NOL deduction one year or two) is neither a ministerial nor a managerial act. 26 C.F.R. sec. 301.6404-2(b)(1) and (2), Proced. & Admin. Regs.” 2014 T. C. memo. 195, at pp. 24-25. (Footnote omitted, but read it. 26 C.F.R. sec. 301.6404-2(c), Proced. & Admin. Regs., Example 12, states in pertinent part, as my expensive colleagues say, “Interpreting complex provisions of federal tax law is neither a ministerial nor a managerial act. Consequently, interest attributable to an error or delay arising from giving the taxpayer an incorrect amount due to satisfy the taxpayer’s income tax liability in this situation cannot be abated under paragraph (a) of this section. [Emphasis added.]” 2014 T. C. Memo. 195, at p.25, footnote 15.)

And Maryann and Tom blew it by not taking a carryback, or by not electing to waive the carryback timely.

No, not a P. T. Barnum “sucker”, rather an Internet fraudster. Now John (“Kosi”) Koskinen is warning the FATCA financial institutions that the Internet phishers are hot on their trail.

The cyberbanditi pretend to be Kosi’s myrmidons, sending e-mails seeking customer info. Kosi and Co. know not whence these cyberscoundrels originate, but they spread their nets wide, blasting cyberspace with phony e-mails and even using obsolete technology like faxes.

For those still encumbered by a Twentieth Century mindset, the practice is called “phishing”.

So, international financialisti, read and heed.

“Financial institutions or their representatives that suspect they are the subject of a “phishing” scam should report the matter to the Treasury Inspector General for Tax Administration (TIGTA) at 800-366-4484, or through TIGTA’s secure website. Any suspicious emails that contain attachments or links in the message should not be opened, and the email should be forwarded to phishing@irs.gov.” IR-2014-92, 9/24/14.

Sorry, guys, the template to which I was referring in my blogpost “A Template”, 9/19/14, is no longer available. The unredacted petition was taken off the Tax Court website, after I told the webmaster and the Ch J’s chambers that it was there. But you wouldn’t have wanted it anyway, as it is sure to draw a Section 6673 delay-of-the-game penalty on grounds of frivolity.

Anyway, Dennis is a retired civil servant, ex-Social Security Administration, who was offered a one-off chance to add to his retirement booty by making a single-shot contribution of $17K to CSRS. I didn’t know what that was either, but it’s the Civil Service Retirement System.

Dennis emptied his bank account, but came up short, so he borrowed the diff from a chum, and paid back the chum and funded his checking account with two draws from a Trad IRA he had.

He wanted CSRS to treat the money he sent as an IRA rollover, but never told CSRS what he wanted. CSRS said nothing.

Of course, he never reported the income on the 1099-R his Trad IRA trustee sent him, so IRS slapped him with a deficiency.

This is a first impression, as rollovers into CSRS never came up before, but Judge Kerrigan, nowise daunted, jumps right in. And it isn’t good news for Dennis.

“To assure that income will be taxed only once, the Internal Revenue Code deems an annuity, such as one for a CSRS participant, to have two components: one taxable, one not. The employing agency withholds a mandatory contribution from the employee’s salary, and that withheld amount is after-tax income because it is taxable for the year in which it is withheld. On distribution that portion is nontaxable because it was already subject to tax. The amount contributed by the employing agency and any interest earned on the employee’s investment are not taxed to the employee until distributed. This portion of the distribution is the taxable component.” 143 T. C. 11, at pp. 5-6 (Citations omitted).

Great, says Dennis, but I will be double-taxed if my $17K isn’t a rollover, because everything I get from my CSRS pension is taxable.

No it isn’t says Judge Kerrigan. Remember dear old Section 72. What was taken out of your pay was taxed in the year taken out, and therefore is nontaxable. You’re taxed on what SSA matched during your tenure there, plus any interest earned.

But, says Dennis, you can roll over an IRA distribution into a “qualifying trust”, CSRS is a qualifying trust under Section 402(c)(8)(a), and IRS agrees.

Judge Kerrigan strips Dennis’ cloak. “Respondent contends, however, that petitioner’s deposit to CSRS does not constitute a rollover contribution under section 408(d)(3) because CSRS does not, and is not required to, accept rollovers.” 143 T. C. 11, at p. 8 (Footnote omitted, but it says that while you can roll from CSRS to an IRA, you can’t roll from an IRA to CSRS.)

IRS also claims that the contribution of the loaned funds, followed by repayment, isn’t qualified rollover money, but Judge Kerrigan blows IRS off, saying you don’t need to roll identical dollars to what you took out, as long as the amount and timing are correct, and anyway, the reluctant trustee ends matters.

And even though the CSRS annuity is defined benefit and not defined contribution, mox nix. Dennis never told CSRS he was trying for a rollover, and CSRS couldn’t accept a rollover under its statutory authority (no Congressional grant of authority to CSRS).

Judge Vaquez concurs, solely on the lack of authority of CSRS to accept a rollover, and cites the Dabney case, which I blogged in my blogpost “The Case of the Reluctant Trustee”, op.cit., as my expensive colleagues say. Judge Lauber agrees.

Judge Buch dissents. The majority says there is no specific Code provision concerning whether trustees accept or reject rollovers. We interpret the law and regs, but don’t invent them. CSRS is a qualified trust, and whether or not CSRS has statutory authority to accept or reject a rollover is nothing to the point. Dabney had to do with whether the rollover was a permitted investment by the trustee, not whether taxpayer could roll over an IRA distribution.

We nail taxpayers with harsh Code provisions (especially in child support cases), and Judge Buch cites a bushelbasketful of them (many of which I’ve blogged). But when the Code doesn’t prohibit a transaction, why do we not follow the plain words of the Code and allow the rollover?

Timing of the two draws prompts Judge Halpern to write his own dissent, agreeing in the main with Judge Buch.

An author, teacher, advocate and trusted advisor, Lew Taishoff is a New York City-based attorney with 52 years of experience in corporate and individual tax and real estate matters. He is an Enrolled Agent, examined and admitted to practice before the Internal Revenue Service, and admitted to practice before the ... Continue reading →